ZON Multimedia towards the future When it is all a matter of ‘fiber’ André Almeida Pinho, 32 years old, director of new product development and product management at ZON TV Cabo, stood in front of his office’s window in Lisbon, Portugal, recalling his short but successful company’s story. He wondered how he might continue its successful path in such a time of aggressive competition and change in the telecommunication sector. Established in November 2007, ZON Multimedia was initially known for its TV cable service but quickly conquered the remaining market with its integrated and innovative offer which also included voice and broadband Internet. By the end of 2008 ZON Multimedia, with a business volume of 773, 081 M€, had achieved a leading position in the Triple Play segment. _____________________________________________________________________________________ Filipa Bilbao prepared this case under the supervision of Nuno Magalhães Guedes, in partial fulfillment of the Dissertation requirements for the degree of MSc in Business Administration, at Universidade Católica Portuguesa, in January 2012, as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. ZON Multimedia towards the future -When it is all a matter of ‘fiber’ Established in November 2007, ZON Multimedia was initially known for its TV cable service but quickly conquered the remaining market with its integrated and innovative offer which also included voice and broadband Internet. By the end of 2008 ZON Multimedia, with a business volume of 773, 081 M€, had achieved a leading position in the Triple Play segment. Yet, in 2008, the technology of ZON Multimedia began to be challenged. The exponential increase in internet data consumption due to the appearance of new services and over-the-top contents was exhausting the cable modem bandwidth and forecasts appointed for a continuous consumption growth. This fact and the almost obvious step forward of PT, its main competitor, to the Next Generation Network (NGN), were reasons enough to be worried about the future. André Almeida wondered how ZON Multimedia could face this threat, whether it should stick to the ongoing technical upgrade of its current access technology (Hybrid Fiber Coax, the HFC) or if it should anticipate its main competitor’s strategy. André Almeida knew that ZON Multimedia was not the company with the highest investment capacity in the market, but he also knew that HFC technology should not be underestimated. The beginning ZON Multimedia is a Portuguese telecommunication company which is listed in the main Portuguese stock market index (PSI-20). See exhibit 1 for ZON Multimedia’s financial highlights in 2008. The name ZON Multimedia resulted from a new identity and a new corporate strategy established as a consequence of the spin-off of Portugal Telecom Multimedia (PTM), currently ZON Multimedia, from its mother company, Portugal Telecom, today its main competitor. The then named PT Multimedia was constituted by Portugal Telecom in the 15th of July of 1999 in order to expand its strategy into the multimedia business. ZON Multimedia’s Triple Play service comprises pay TV by cable or satellite, broadband internet and fixed voice. The three services were inherited from PTM when the company was still part of Portugal Telecom Group. Cable TV was its initial service. The fixed voice service, however, had been launched in January of 2007, a few months before the spin-off. The distribution of audiovisual material and the operation of cinematographic theaters are the other two businesses that complete ZON Multimedia portfolio. The mobile voice service was launched only in September 2008, extending ZON Multimedia offer. The main goal of integrating these different business areas was to provide a broad number of options to customers and satisfying as many telecommunications and entertainment needs as possible. 2 ZON Multimedia towards the future -When it is all a matter of ‘fiber’ ZON TV Cabo, ZON Lusomundo Cinemas, ZON Lusomundo Audovisuais and ZON Conteúdos and their subsidiaries plus ZON Açores and ZON Madeira are the companies that make up the structure of ZON Multimedia and ensure the offer of all these services throughout the Portuguese territory. Exhibit 2 depicts the simplified structure of ZON Multimedia. During the year of 2008 ZON Multimedia acquired three cable TV companies in order to consolidate its presence in the market. In the end of 2008, ZON Multimedia had more than 1.500 employees and almost 3 million clients. It was the leader of the Portuguese pay TV market, the second largest internet provider and the third largest player in the fixed voice market. Exhibit 3 shows operational performance indicators of ZON Multimedia in 2008. The PTM Spin-Off The pressure made by the Portuguese Competition Authority (Autoridade da Concorrência, AdC) did herald the PTM spin-off. At that time, Portugal Telecom owned, simultaneously, the old copper cable network with Asymmetric Digital Subscriber Line technology (ADSL) and the coaxial cable network with the cable modem technology. This made Portugal one of the last European countries where cable modem and ADSL infrastructures were owned by the same company. The spin-off would separate those technologies among different owners and their evolution would make the market much more competitive, benefiting the sector. The AdC concern was to stimulate competition with the goal of creating better and more dynamic companies to the consumer’s advantage. The spin-off happened in 2007 after a thirteen-month battle over a hostile takeover from Sonaecom over the Portugal Telecom capital. On the 21st September of that year the new Executive Management Team was named. A new phase of the institutional development of PT Multimedia was beginning. In that meeting the board accepted the resignation of the Executive Management Team president, Zeinal Bava, and the members Manuel Rosa da Silva, Francisco da Silva Nunes and Pedro Durão Leitão. Joaquim Goes, member of the board of directors, also presented his resignation. In the same meeting, the board named Rodrigo Costa as president of PTM, José Pereira da Costa as CFO and Luís Lopes and Duarte Calheiros as members of the executive committee. With this, Portugal Telecom and PT Multimedia no longer had any members of their respective Board of Directors in common. Thus, from then on PT Multimedia was an independent company with no relation at all to PT. After the nomination of the Executive Management Team, André Almeida Pinho was one of the first key persons to be invited to move from PT to PTM. He was the Manager of Strategy and Business Development of PT Comunicações and had been a Ford award winner for best MBA student at Insead 3 ZON Multimedia towards the future -When it is all a matter of ‘fiber’ in 2004. If accepted, the invitation would put him in charge of all the product areas (TV, net and fixed voice) of PTM, presenting him with the stimulating challenge of having to compete against his old employer in a time of significant change in the telecommunication market worldwide. The level of disruption caused by the spin-off was high. Zeinal Bava, former CEO of PTM and new CEO of PT, met over the weekend with the first and second line PTM directors of several areas and took with him more than 20 managers of the main departments, that is, almost 90% of the PTM managers. A fast process of direct transfer of managers between PT and PTM and the selection and recruitment of a new team of managers were the topics of the day. In the news many wrote that even if the direct transfer was to affect both companies equally, PTM would always be the most disturbed of the two, since it had a less experienced team than PT. In response to these statements, Rodrigo Costa, new CEO of PT Multimedia, speaking to ‘Diário de Negócios’ newspaper said: ‘It was in my expectations that this could happen, I just did not anticipate how many managers would go to PT’. The CEO also took the opportunity to reaffirm that the PTM spin-off was not an arranged deal and that the current situation was an obvious proof of it. Knowing that the transfer of managers had been a voluntary process, Rodrigo Costa also knew that those still at the company were certainly motivated to start working with him in this new challenge. As a matter of fact, PTM was hiring new managers at a record pace, including recruitments made by André Almeida for management positions at each of the key businesses of PTM, since the 1.5 million customers company was virtually on the edge of no day-to-day management capabilities below the board level. At the general meeting of shareholders held on the 2nd of March 2007 the proposal of Sonaecom was rejected and the hostile takeover was extinguished. On the 14th of November of 2007, PTM made the announcement that from that day on PT no longer held any direct capital participation on PT Multimedia. The spin-off was officially concluded. On the 27th of November, PTM made the announcement that it would acquire from PT all the network equipment related to cable television for a total of 21.6 M€. Both companies also signed an agreement through which PT would provide to TV Cabo (now owned by PTM) services related to the network infrastructure by a period of 3 years. This would mean a short to medium term risk to PTM, with the renegotiation expected for late 2010. In the following January, shareholders approved ‘ZON Multimedia’ as the new corporate name. A renewed company was born with the ambition to lead the Portuguese telecommunications market. 4 ZON Multimedia towards the future -When it is all a matter of ‘fiber’ The Portuguese Telecommunications market Triple Play is the name of the game In the telecommunications market, the triple play service allowed operators to offer at the same time high speed internet access, pay TV and fixed voice.